My Say: Infrastructure driving Asian growth again

This article first appeared in Forum, The Edge Malaysia Weekly, on May 13, 2019 - May 19, 2019.
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The bad news on the global front does not seem to subside. US President Donald Trump’s renewed threats to impose additional tariffs on Chinese exports have aroused another bout of fear of a trade war. There have also been growing concerns over how much support global demand will lend to Asian exports as a result of the unexpected deceleration in growth in the later part of 2018. And, if that were not enough, the US’ actions against Iran — including the deployment of substantial additional naval forces to the Middle East — have stirred fears of a political shock in the region that could cause oil prices to spike to levels that could undermine global growth.

All the more important then that Asian nations find new domestic engines of growth that are impervious to global forces. This is where an infrastructure build-up comes in.

Recent developments give us more confidence that infrastructure development will indeed become a major energising force for economic growth. With many of the elections that were creating uncertainty either completed or out of the way soon, we expect a big further push to improve infrastructure. Moreover, China seems to be recalibrating its approach to its Belt and Road Initiative (BRI), which we believe will lead to greater financial support for building roads, ports, airports and power stations in Asia and ­Africa — not just with help from China but also countries such as Japan and the US.


Where does Asia stand in terms of infrastructure?

First, there is a huge gap between the infrastructure that Asia needs and how much is actually being built. The Asian Development Bank estimated some years ago that infrastructure spending of US$1.7 trillion (S$2.3 trillion) is needed in Asia each year through 2030. The gap is acute in Southeast Asia, where real infrastructure investments (in 2015 US dollars) stood at just US$55 billion, far short of the US$147 billion that is required — for example, Indonesia spends roughly US$23 billion a year against the US$70 billion that is actually needed. The gap is also particularly glaring in India — US$118 billion of actual spending against the US$230 billion that is needed. But it gets worse, as these estimates do not take into account the money that will have to be spent to mitigate the damage from climate change, including what has to be spent to curb Asia’s carbon emissions and reduce its carbon footprint.

Second, and more encouragingly, there is evidence that several regional countries are beginning to get their act together, allowing a sizeable expansion in spending on infrastructure. In the case of Indonesia, the Philippines, Malaysia and Singapore, we are seeing a distinct uptrend in public spending on infrastructure projects as a share of GDP. There has been notable progress in the Philippines. Vietnam has been doing well, too, as seen in its having the highest share of GDP devoted to infrastructure in the region — in excess of 7%. Thailand’s infrastructure effort as measured by the ratio of public spending on infrastructure to GDP has been flat in recent years but the large projects that are in the process of implementation suggest that we should see a substantial increase in the coming two years. The disappointment has been India — while it has made strides, it has not enjoyed a meaningful rise in the share of economic output spent on infrastructure construction. Its infrastructure spending as a share of GDP has remained below 2% since 2011. As other Asian countries improve their infrastructure, India needs to run very hard just to stay put — and the hope is that it will ramp up its efforts.


Where is the action in infrastructure?

So, which are the countries where infrastructure is likely to be a major source of growth? We outline below some trends in key countries to give a flavour of the action:

•     Indonesia is likely to see more vigorous infrastructure expansion. Twenty National Strategic Projects were completed in 2016 and 10 in 2017, followed by a big surge to 32 in 2018. Another 30 such projects worth IDR276 trillion (S$26.2 billion) should be completed by the third quarter of this year. With President Joko Widodo safely re-elected recently, we are confident that infrastructure development will get a further fillip.

•     President Rodrigo Duterte’s administration in the Philippines has an ambitious “Build Build Build” plan to spend trillions of pesos. As of February this year, 37 out of 75 flagship projects have been approved. Projects in the pipeline include the development and upgrading of several airports, which should stimulate the aviation and tourism industries. Several national railway and subway projects such as the PHP344.6 billion (S$9 billion) Philippines National Railway South Commuter Line and PHP357 billion Metro Manila Subway are also in the works to improve the county’s transport system.

•     In India, Prime Minister Narendra Modi’s government’s ambitious plans centred around the construction of roads and highways stretching 34,800km. However, the programme has run into delays, as only 137 road projects with an aggregate length of 6,530km have been awarded and are in various stages of implementation as of February this year. Still, the pace of road construction shot up in the course of the fiscal year that is just ending, reaching a record high of 30km of new roads per day — short of the government’s target of 45km per day but still a marked improvement.

•     Thailand is likely to see a surge in infrastructure construction under its forward-looking Thailand 4.0 master plan. A major focus of spending will be on the Eastern Economic Corridor, which is the centrepiece of the government’s ­medium-term plans to move Thailand up the value curve.

•     In Malaysia, the Pakatan Harapan government has now revived the China-­backed East Coast Rail Link project, which it had deferred upon taking power last year, at a renegotiated price of RM44 billion (S$14.4 billion), which is a third lower than its earlier price tag. Construction is set to commerce as soon as this month with the new date of completion reset to 2026. However, other major projects that had been backed by ­China such as the Trans-Sabah Gas Pipeline and the Multi-Product Pipeline have not been given the go-ahead. Similarly, there appears little chance that the high-speed rail between Kuala Lumpur and Singapore will be revived anytime soon.

•     Singapore, which already has excellent infrastructure, is not sitting on its laurels. It will be aggressively expanding its mass transit system. The Thomson-East Coast MRT Line spanning the north, south and east of Singapore is already under construction, after which phase one of the 50km Cross Island Line that cuts across the east-west corridors will commence. Furthermore, phase two of the Deep Tunnel Sewerage System to meet Singapore’s long-term water needs has commenced on Nov 17 and is expected to wrap up by 2025. The second phase, which will cost S$6.5 billion, connects Marina Bay to Tuas.


A revamped BRI will spur even more infrastructure construction

The recently concluded Belt and Road Forum in China points to the Chinese authorities accepting that there had been shortcomings in the initial phase of its ambitious BRI. In his remarks at the BRF, Chinese President Xi Jinping promised to “adhere to the concepts of openness, greenness and cleanliness”, a clear signal that China had got the message from the rising tide of criticisms of its BRI. These have centred around issues such as the level of debt used to fund the projects being far above the capacity of the recipient countries to repay; the lack of transparency in how deals were being negotiated, with excessively high costs in some projects raising suspicions of corruption; question marks over the financial viability of projects that some claimed were meant more to satisfy China’s geo-strategic needs than the recipient countries’ true needs; and the potential environmental damage that many BRI projects could cause.

It is likely that China will recalibrate its strategy on the BRI to rectify some of its failings in these areas. This will then allow another surge in Chinese-funded projects across Southeast Asia. For example, China’s role in infrastructure development in the Philippines looks set to intensify. Among the 37 projects approved by the National Economic and Development Authority, 10 are financed by Chinese loans and two by Chinese grants.

China’s infrastructure activism in turn is encouraging other development institutions to ramp up their efforts to help Asian governments finance infrastructure. The Asian Development Bank and various Japanese agencies have expanded their activities in infrastructure, for instance.


Conclusion: Higher and more resilient growth prospects in the region

An intensification of the infrastructure effort will yield multiple benefits.

First, it will boost growth in the near term because higher spending on construction will boost demand and yield spillovers into a range of different sectors such as building materials, finance and engineering services.

Second, because infrastructure spending is domestically driven, it is more likely to be sustained even if the world economy is slowing. In this way, it will enhance the country’s resilience, making it more likely to be able to absorb shocks in the global environment and bounce back strongly.

Third, there will be more important long-term benefits. Removing constraints on growth due to inadequate roads, ports, power generation or airports will help spur growth. Moreover, the improved connectivity should boost growth potential in regions that had been left behind in economic growth because of their lack of access to markets, for example. For instance, the simple improvements in roads in Indonesia is reported to have stimulated a relocation of some industrial activities from the overcrowded industrial suburbs of Jakarta to east and central Java. In the Philippines, where economic development has been even more hampered by the lack of connectivity among the thousands of islands that make up the archipelago, we are likely to witness significant new synergies being released.

We see Indonesia, the Philippines and Thailand gaining significantly in this regard — but only if they ensure that higher infrastructure spending does not cause current account deficits to widen to alarming levels. Thailand runs a comfortable current account surplus, so it has less to worry about. But last year, we saw the Indonesian rupiah and the Philippine peso weaken sharply when their current account deficits expanded — particularly because these countries tended to rely on less stable types of funding such as fickle investment in bonds and equities rather than equity investments. Encouragingly, both countries took swift action including aggressive rate increases that convinced financial markets that policymakers had the situation well under control — we believe that this risk can be contained.

In which case, the region can look forward to higher growth in both the short term as well as beyond that.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

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